Central Transport Hub - Polityka Insight

Central Transport HubBuilding Poland’s New Transfer Airport

Central Transport Hub

Building Poland’s New Transfer Airport

Executive summary

Worldwide, in 2018 4.3 billion people travelled on scheduled flights, a 6.5% increase from the year before. According to the industry organization IATA, in 2019 this number may rise by a further 6%, to 4.6 billion passengers. Every year air travel increases its role in the growth of business and tourism. It also exerts a substan-tial influence on investments and migration. The Polish aviation industry is still modest, however, constituting a bit over 1% of global air traffic.

Air transport also plays a crucial role in the carriage of goods, representing up to 35% of global trade value. Aircraft carry high-value, low-weight cargo, such as computer chips, as well as, more and more often, e-commerce packages. These are goods with the highest influence on creating added value in the economy. However, Poland is still in the periphery when it comes to air cargo transport.

Both kinds of air transport−passenger and cargo−are concentrated at hub airports. Cities and countries where such hubs are located gain tangible bene-fits: economic, social and political. There are currently no major hub airports in Poland or Central & Eastern Europe. Warsaw Chopin Airport, the largest airport in this part of the continent, does not rank among the top 30 European airports by passengers per year. Thus passengers travelling from Poland (especially in case of intercontinental flights) must fly with transfers. The main hubs handling traffic from Poland are Frankfurt and Munich, London Heathrow, Paris Charles de Gaulle, Amsterdam, Moscow Sheremetyevo, Dubai, and Doha.

Despite the lack of a significant hub in Poland, in 2016 the Polish aviation industry created 40,500 jobs in companies related to the industry. Together, they created PLN 7.1 billion in added value. The aviation industry is one of the most efficient sectors of the Polish economy. One person employed in passenger air traffic produces PLN 600,000 of added value, six times the average for Polish workers. Polish airports contribute up to 5% of GDP, twice the average for the European Union, which is 2.6% of GDP.

However, due to the fast growth of local demand for air transport (much faster than the European average), the lack of regional hubs, and increasing congestion of Western European airports, Poland has the potential to join the group of coun-tries with their own large transfer hub. This won’t be possible, however, without a significant expansion of airport infrastructure, as the current infrastructure is not able to fulfil that role. The Central Transport Hub (CTH; Polish: Centralny Port Komunikacyjny or CPK), a flagship infrastructure project of the Law & Justice (PiS) government, is a project that on one hand is supposed to increase the capacity of air traffic from central Poland, as required to promote growth. It should also enhance the country’s prestige, as with a transfer hub Poland will be able to participate more effectively in global trade and tourism. There is no doubt, however, that decisions regarding the method of airport expansion in Central Poland are undertaken with delay, currently under time pressure, as the capacity of Warsaw Chopin Airport will be exhausted in the early 2020s.

The authors of this report do not contemplate the issue of whether CTH should be created, assuming that such a decision has already been made. This is indicated by the political will of the current government, creation of a special-purpose vehicle company (SPV), and initiation of the required legal procedures. However, due to the importance of such a project and the ambitious schedule of works, it seems necessary to perform a quick but comprehensive analysis of the risks related to construction and management of CTH.

Construction of a new airport is a moderately challenging task when it comes to technology. The real challenge lies in constructing a hub that will gain signi-ficant, at least continental importance. Thanks to its advantageous geographical location, Poland has a chance to take over a substantial part of transfer traffic between Europe, North America, and Asia. Construction of CTH is additionally made easier by the availability of a development site, as well as existing rail and road infrastruc-ture that can be easily expanded. Another advantage is the good condition of LOT Polish Airlines, by far the largest and fastest-growing airline in this part of Europe. LOT is a natural candidate for the primary carrier at the airport.

CTH development plans must be realistic, however. Even with the most optimistic forecasts, the new transfer airport will be a midsize hub, comparable to the Oslo and Munich airports. Over-scaling of the project may lead to significant inflation of its costs and complexity. At the same time, a plan that is too modest can be equally dangerous, making it necessary to expand the airport soon after its completion.

Even the largest hubs service mostly local traffic. CTH’s success will thus be determined by the airport’s accessibility to the largest possible number of pas-sengers from central Poland, as well as the country’s economic situation. On the other hand, attracting transfer traffic could leverage the beneficial impact of CTH on the Polish economy. It can also serve as a buffer in case of a crisis, as even in the event of an economic slowdown of Poland CTH may still be used by passengers from other countries not planning to visit Poland, generating value for the Polish economy.

Plans related to CTH construction also need to take into account the observed aviation industry trends that will shape the air traffic structure in the upcoming years. They should also realistically gauge the growth possibilities of LOT, as the condition of the national carrier will be critical for the success of the new airport. Due to the politicization of the project, there exists a danger of making over--ambitious growth projections for the Polish carrier, as it probably won’t make it into the top 10 European airlines. CTH should be constructed primarily for LOT, but at the same time take into account market realities, and the scale of operation of the Polish airline and its competitors. It’s especially important to develop CTH also as a cargo hub; at present air cargo traffic bypasses Poland.

CTH construction is based on a special act of 2018, which should be regarded as a positive approach, as experiences from other countries show that such complicated projects require special, streamlined regulations. However, the special-purpose vehicle created by the act must make critical decisions regarding the model of CTH construction financing and further airport management. Poland is not able to finance construction of the airport itself using EU funds (unlike rail and road projects), but it should be easy to raise funds from the market, as high returns on investment characterize airports of such scale. From this perspective, the most beneficial way of engaging private investors would be a public-private partnership in the project finance model. Choice of a specific investor is strategic, however. On the one hand, the most attractive partners when it comes to financing, knowhow, and potential subsequent airport management are industry investors associated with airport groups, especially from Southeast

and East Asia (excluding Chinese entities). On the other hand, airport construction may be financed by investment funds specializing in infrastructure projects.

The general CTH plan, as well as the architectural design of the airport, also poses strategic challenges. The long-term prospects for airport traffic show very high growth stability, doubling every 20 years. The profile of air traffic is also changing. The most critical problems include predicting the profile of local traffic (including possibly forgoing short-distance air transport), use of new technologies (biome-trics, AI), ecology and project maintenance costs, new hybrid business models of airlines, new preferences of passengers for airport shopping, transportation to airports etc. The special-purpose vehicle should look to external entities (such as companies experienced in airport planning) for support in the search for answers to these challenges. An airport constructed in the 2020s should be able to support the market needs at least until the end of the 2030s.

The goal of this report is primarily to identify challenges related to CTH con-struction and to initiate a broad, depoliticized debate concerning the method of constructing this airport for it to function correctly and generate benefits on the local, national and EU level. In the authors’ view, the idea of CTH development has a deep market rationale, but it entails many risks that can lead to failure of the whole initiative. Poland has no experience in such large projects, and there is not much time left for decisions. Thus it is necessary to make decisions consciously, even if this requires modification of the original schedule. Mistakes made in the planning stage may be too difficult and costly to correct later.

CTH’s success will thus be determined by the airport’s accessibility to the largest possible number of passengers from central Poland, as well as the country’s economic situation.

AUTHORS

POLITYKA INSIGHT Dominik SipińskiTransport and Infrastructure Analyst

Adam CzerniakChief Economist

BAKER MCKENZIE

Marta FredrychAssociate

Paweł Wajda of Counsel

Tomasz KaczmarekCounsel

TRANSLATION

Jacek Smycz

EDITOR Christopher Smith

GRAPHIC DESIGN

Justyna Nowak

The report was produced in partnership with Baker McKenzie. The report is impartial and objective. All rights reserved.

Baker McKenzie helps clients overcome the challenges of competing in the global econo-my since 1949. We solve complex legal problems across borders and practice areas. Our unique culture, developed over 65 years, enables our 13,000 people to understand local markets and navigate multiple jurisdictions, working together as trusted colleagues and friends to instil confidence in our clients. Office in Warsaw was established in 1992 and currently more than 100 lawyers and tax advisors are employed there, making it one of the biggest law firms in Poland.

POLITYKA INSIGHT is the first platform of knowledge in Poland designed for business CEOs, politicians and ambassadors accredited to Poland. It was founded six years ago and currently consists of three business lines: analytical services (PI Premium, PI Finance and PI Energy), tailored research services (e.g. reports, presentations and workshops prepa-red for companies, administration and international organisations), as well as high-profile events and conferences.

www.politykainsight.pl/en

Warsaw, April 2019

Contents

Key data & definitions

Market description

Air traffic in Poland

Air traffic in central Poland – detailed analysis

Polish air traffic growth forecasts

Impact of aviation on the economy of Poland

Scenarios for central airports

Central Transport Hub replaces Chopin Airport

CTH and Chopin Airport active concurrently

How to build CTH

What will be the influence of market changes on CTH?

Potential gains and losses of the Polish economy

Who is going to pay for CTH construction?

CTH – legal perspective authors: Baker McKenzie

Who is counting on the success of CTH?

Airlines

Airports

Service and TSL industry companies

Society

Case studies. Where airports have been built

Recommendations

Literature

10

14

14

24

29

32

35

37

38

39

41

45

47

50

61

62

63

64

65

66

70

74

10 Polityka Insight Central Transport Hub

Key data

airline passengers in 2018

passengers per year at the busiest airports

cargo per year at the busiest cargo airports

POLAND

4.3 bn

107.4 mn(Atlanta, 2018)

5.1 mn tonnes

(Hong Kong, 2017)

160 million passengers

1.1 bn

80.1 mn(Londyn-Heathrow,

2018)

2.2 mn tonnes

(Paryż CDG, 2017)

0.05 bn

17.8 mn(Warsaw Chopin

Airport, 2018)

0.08 mn tonnes

(Warszawa Lotnisko Chopina, 2017)

GLOBAL EUROPE

in Europe who will not be able to use air transport in 2040 due to infrastructure overcrowding (capacity gap)

Central Transport Hub Polityka Insight 11

PLN 600,000 added value per employee in passenger air transport in Poland

46.7%

3.2% 4.5%

60%

28,000 people PLN 11.4 billion

0.7% 5.0%

Warsaw Chopin and Modlin airports’ share of air traffic in Poland (2017)

estimated contribution of CTH construction to Polish GDP during construction

estimated sustained contribution of CTH launch to Polish GDP

LOT share of scheduled flights at Warsaw Chopin Airport (April 2019)

people employed by companies related to the aviation industry in Poland (2016)

added value created by companies related to the aviation industry in Poland plus indirectly by the industry (2016)

aviation industry’s share of Polish GDP (including indirect effects)

estimated total contribution of Polish airport operations to GDP


Centralny Port Komunikacyjny (CTH, Central Transport Hub) – a planned project encompassing construction of a new hub airport in the municipality of Baranów on the western edge of the Mazovian voivodeship, as well as a new rail and road node.

Charter airline – an air carrier offering flights not available for individual public purchase. A charter airline may sell tickets to travel agencies or lease aircraft to individual clients.

Code-share – a type of trade agreement between two airlines allowing them both to sell tickets for the same flight regardless of which airline services it physically. Code-share should be distinguished from a joint-venture agreement, where carriers practically act as a single company on routes covered by the deal, sharing costs and income. Looser forms of airline cooperation also exist, such as special prorate agreement (SPA) and interline, allowing the sale of tickets for connections served by other companies with unique, more attractive conditions.

Connection wave – a specially developed flight schedule of a full-service airline, direc-ting aircraft from various directions to a hub at the same time. Such a plan leads to concentration of operations in a short period, but also enables more convenient and shorter connections for passengers. MCT (minimum connecting time) defines the shortest possible time between the arrival of a passenger and his or her departure on another flight from the same airport.

Hub, hub airport – an airport allowing passengers to change flights without leaving the airside zone (no need to pass border control, but additional security check is possible).

Definitions


Legacy airline, full-service carrier (FSC) – an air carrier offering transport services including the possibility of purchasing connecting flight tickets with a changeover at a hub airport, usually offering tickets with additional services included in the price, as well as business-class tickets.

Low-cost carrier (LCC) – an air carrier offering transport services from point A to B, with or without minimal possibilities for reservation of tickets with transfers to point C on one ticket. Usually the carrier sells tickets without additional services, such as baggage transport or in-flight meals, which passengers must purchase separately.

Narrow-body aircraft – an aircraft with a narrow fuselage cross-section and one pas-senger aisle, with six or fewer seats abreast. Maximum capacity of 240 passengers in case of Airbus A321neo.

Point-to-point flight – air connection between airports A and B, without the possibility of continuing the journey to airport C as part of the same reservation.

Regional airport – an airport where passengers do not change flights (e.g., they have separate tickets for subsequent trips, without a guarantee of onward travel, for exam-ple in case of a delay of the first flight). This includes all airports in Poland other than Warsaw Chopin Airport.

Wide-body aircraft – an aircraft with a wide fuselage cross-section and two passenger aisles, usually with seven or more seats abreast in economy class. Used mostly for long-distance flights (example: Boeing 787 Dreamliner).


Air traffic in Poland

In 2018, around 46 million passengers travelled through Polish airports. This was 15% more than in 2017 and four times the number from 2005, the first full year of Poland’s membership in the European Union. Excluding the crisis year of 2009, the number of passengers in Poland has been growing steadily, at a rate much higher than the EU average, stemming from the still low mobility factor of Poles1, leading to considerable market growth potential. Low-cost carriers play a significant role in generating air traffic growth in Poland. In 2018 such carriers had a 55.9% share in the total number of passengers (enplaning and deplaning) in Poland.

The growth of low-cost carriers in Poland became possible after joining the European Union and related liberalization of the aviation market. According to EU regulations, European Union carriers2 can freely operate flights between all member states. Thanks to this, low-cost carriers can offer flights between countries

1. The average number of flights per person per year. In Poland, the mobility factor barely exceeds 1, while in Western Europe it ranges from 2 to even greater than 3.2. To qualify as an EU carrier, an airline must be a) registered in an EU member state, b) owned mostly by EU entities and c) under the effective control of EU owners.

Market description

46 million passengers

travelled through Polish airports in 2018


Warsaw

Radom

Modlin

Modlin

KrakówKatowice

Rzeszów

Rzeszów

Lublin

Lublin

Gdańsk

GdańskPoznań

Łódź

Łódź

Bydgoszcz

Szczecin

Szczecin

number of passengers

share

Wrocław

AIR TRAFFIC IN POLAND IN 2018

Source: CAA.

Zielona Góra

Szymany

x

30%40%

20%10%0%

CHANGE SINCE 2017 R.Air traffic growth win the last 15 years concerns mainly regional airports.

0.8 mn

0.6 mn

0.5 mn

0.2 mn

0,1 mn

0,02 mn

0

17.7 mn

Warsaw

Kraków

Katowice

Wrocław

Bydgoszcz

Poznań

Zielona Góra

Szymany

0.4 mn

2.5 mn

3.1 mn

3.3 mn

4.8 mn6.8 mn

5 mn


AIR TRAFFIC IN POLAND 1993–2018

number of passengers

Source: CAA.

1993 1995 2000 2005 2010 2015 2018

5

0

10

15

20

25

30

35

40

45

other than the airline’s home country; for example, Ryanair (formally Irish) or Wizz Air (Hungarian) can freely fly from Poland to the United Kingdom, and so on.

This allowed economic emigration (including to Scandinavia and Benelux) to become a strong impulse for Polish aviation growth after joining the EU. Low-cost carriers offered a large number of new direct routes and low ticket prices, increasing the demand for flights.

The entry of low-cost carriers mostly contribu-ted to the growth of air traffic at regional airports, earlier operating only a small number of connec-tions with hubs (Warsaw and foreign hubs, mainly in Germany). Low-cost carriers operating in the point-to-point model could offer profitable flights on routes other than those operated by full-service airlines, whose business model is based on flights to and from hubs. The number of passengers at Polish

In the last 14 years the share of regional airports in the Polish air traffic has doubled.

W ciągu ostatnich 14 lat udział lotnisk regionalnych w ruchu lotniczym w Polsce podwoił się.

mn


regional airports (including Modlin airport, serving Warsaw) doubled from 31.1% in 2004 to 60.6% in 2017.

Expansion of low-cost carriers in Poland coin-cided with the crisis of LOT Polish Airlines. In 2013, the flag carrier lost the position of Polish market leader in terms of the number of pas-sengers served, to Ryanair. LCC expansion was also one of the main reasons for this crisis. Since then the Polish carrier has become profitable again, but it did not regain the lost market share. It still serves fewer passengers than its Irish rival, but remains ahead of Wizz Air.

However, LOT has maintained its special significance for Poland, as it is the only full--service flag carrier with an extensive network of long-haul connections. Flights of this kind are the most profitable ones and generate significant economic benefits for the country, helping cre-ate new jobs and improving the country’s appeal

to investors. Operating a hub in Warsaw incre-ases the accessibility of Poland for fundamental political and trade partners, and contributes to the growth of transit traffic. Because of that, if the already small hub in Poland were to disap-pear or decrease in scale, it would undoubtedly negatively impact the entire economy.

Poland and the entire large Central & Eastern Europe region remain outside the area of direct influence of the three largest aviation groups, operating their bases at the main Western Euro-pean airports, as well as subsidiaries in most countries in that region. This could change in the event of further market consolidation and acquisition of LOT or another regional airline by one of the large aviation companies. Curren-tly, the largest carriers treat this region only as a source of passengers “exported” to hubs in Western Europe, Russia, Turkey or the Middle East, where they transfer to long-distance flights.

0

28.7%

26.1%

21.7%

5.6%

2.2%

2.1%

1.5%

1.4%

1.0%

2 4 6 8 10 12 mn

LARGEST CARRIERS ON THE POLISH MARKET IN 2018

market sharenumber of passengers

Source: CAA.


LufthansaEurowingsSwissAustrian AirlinesBrussels Airlines

1.75 0.67 0.44 0.33 0.25

mnmnmnmnmn

3.44 mn

LARGEST AVIATION GROUPS IN EUROPE

number of seats offered per week

A strip from Scandinavia through Poland to Greece remains outside the direct influence of the main European aviation groups.


mn

mnmnmn

mnmnmn

mnmnmn

2.71 mn 2.05 mn 1.61 mn 1.27 mn

1.17

0.650.61 0.28

1.090.780.18

1.090.16 0.02

1.61 mn

number of seats offered per week

British AirwaysVuelingIberiaAer Lingus

Air FranceKLMTransavia

AeroflotPobedaRossiya

Turkish Airlines

Dublin

London -Gatwick

London -Heathrow

Frankfurt

Düsseldorf

Munich

ViennaParis-OrlyParis-CDG

Madrid

Barcelona

Istanbul New Airport

Istanbul Ataturk

Moscow Sheremetyevo

St. Petersburg

Moscow Vnukovo

Source: ch-aviation.

Brussels

Amsterdam

ZurichGeneva

Rome Fiumicino


As a full-service carrier with a hub in Warsaw, LOT is much more focused on the operation of that airport, treating other airports in Poland as feeder installations (except for single flights, mostly to Israel and Ukraine). Despite causing negative emotions in the regions, this structure of the connection network is the only sensible one in the case of hub construction, and it will not change significantly in the future. Low-cost carriers, on the other hand, are diversifying their operations and do not offer as many fli-ghts from even their most important airports as full-service carriers from hubs.

LONG-DISTANCE CONNECTIONS OFFERED BY TRADITIONAL CARRIERS FROM POLAND

Air Canada

Air China

Emirates

Qatar Airways

LOT (excluding LOT charter flights)

seasonal

seasonal

New York

Miami

Chicago

Los Angeles

NewarkToronto

Source: ch-aviation.

LOT is the largest airline in Central & Eastern Europe. It offers six times more flights from Warsaw each week than Ryanair from its largest Polish airports (Modlin and Kraków).


Seoul TokyoBeijing

Singapore

Dubai

NewDelhi

Colombo

Doha

Warsaw

RzeszówKraków

The dynamic growth of aviation in Poland, especially outside Warsaw, has caused invest-ment pressure at airports. The vast majority of Polish airports still use infrastructure built seve-ral decades ago, or even before World War II, as in the case of Warsaw Chopin Airport (Sipiński, Cybulak, Placha 2016). Even the new airports in Szczytno, Radom, and Modlin were created by converting earlier airfields. Only the Lublin airport was constructed basically from scratch as a greenfield project (although at the site of a former sport airfield).

The development possibilities of existing air-ports, such as construction of new runways, are often limited due to lack of free space or errors in location. Development of new terminals, incre-

asing capacity, is a less significant problem due to smaller space requirements. Kraków airport (Poland’s second-largest) is an exception here, as a nearby military base occupies the space required for terminal expansion.

The last large development drive at Polish airports, significantly increasing their capacity, took place in connection with the 2012 UEFA European Football Championship and shortly thereafter. Further development projects related to Polish airports will be required in the 2020s. Regional airports do not currently have capacity problems, unlike airports serving central Poland, which are currently at nearly full capacity and without expansion or construction of new air-ports won’t be able to handle growing air traffic.


Airline Country Base Relations with large groupsSeat availability per week (approximately)

LOT Poland Warsaw Trade alliance with Lufthansa Group 250,000 (including Estonian virtual carrier Regional Jet/Nordica, where LOT has shares)

Norwegian Norway Oslo and numerous others

Independent low-cost airline, 4.6% of shares owned by IAG

920,000 (excluding Argentina branch)

SAS Denmark/ Sweden/ Norway

Copenhagen, Stockholm, Oslo

Trade alliance with Lufthansa Group 810,000

Finnair Finland Helsinki Joint venture with IAG 340,000

Ukraine International Airlines

Ukraine Kiev Boryspil Loose trade cooperation with Air France-KLM

170,000

airBaltic Latvia Riga, Tallinn, Vilnius Independent low-cost carrier, no long-distance ambitions

110,000

Aegean Airlines

Greece Athens Trade alliance with Air France-KLM

110,000

Blue Air Romania Bucharest Independent carrier 100,000

CSA Czech Airlines

Czech Republic Prague Loose trade cooperation with Air France-KLM

90,000

Tarom Romania Bucharest Trade alliance with Air France-KLM

80,000

LARGEST CARRIERS IN CENTRAL & EASTERN EUROPE AND NORTHERN EUROPE


Airline Country Base Relations with large groupsSeat availability per week (approximately)

LOT Poland Warsaw Trade alliance with Lufthansa Group 250,000 (including Estonian virtual carrier Regional Jet/Nordica, where LOT has shares)

Norwegian Norway Oslo and numerous others

Independent low-cost airline, 4.6% of shares owned by IAG

920,000 (excluding Argentina branch)

SAS Denmark/ Sweden/ Norway

Copenhagen, Stockholm, Oslo

Trade alliance with Lufthansa Group 810,000

Finnair Finland Helsinki Joint venture with IAG 340,000

Ukraine International Airlines

Ukraine Kiev Boryspil Loose trade cooperation with Air France-KLM

170,000

airBaltic Latvia Riga, Tallinn, Vilnius Independent low-cost carrier, no long-distance ambitions

110,000

Aegean Airlines

Greece Athens Trade alliance with Air France-KLM

110,000

Blue Air Romania Bucharest Independent carrier 100,000

CSA Czech Airlines

Czech Republic Prague Loose trade cooperation with Air France-KLM

90,000

Tarom Romania Bucharest Trade alliance with Air France-KLM

80,000


Air traffic in central Poland – detailed analysis

Two large airports currently serve central Poland: the state-owned Chopin Airport in Warsaw (formerly known as Okęcie) and the municipal and state-owned Warsaw--Modlin in Nowy Dwór Mazowiecki. The municipal airport in Łódź supports these installations, but is mostly a local airfield, without greater appeal to passengers from outside Łódź, who choose to fly from Warsaw primarily due to the better offer of flights. This report does not include a more detailed analysis of the situation of the Łódź airport.

There is also an additional airport in central Poland, the state-owned Radom, but currently it does not serve any scheduled flights. Its new owner, Polish Airports State Enterprise (PPL), plans to expand it and allow it to function as a secondary airport for Warsaw, taking over charter and low-cost flights from Chopin Airport. A study of the advisability of current investments in the Radom airport is beyond the scope of this report. The peripheries of the region are also served by Bydgoszcz, Lublin, and Szymany airports.

AIRPORTS IN CENTRAL POLAND

Warsaw 17.8 mn

3.0 mnModlin

100% Polish Airports State Enterprise (PPL)

28.5%Military Property Agency

42.3%Mazovian Voivodeship

25.2%PPL

4.0%Nowy Dwór Mazowiecki

Main LOT transfer airport, Wizz Air base, serving flights of other traditional lines, charter and cargo.

Low-cost airport used by Ryanair.

0

0.2 mn

NUMBER OF PASSENGERS IN 2018

OWNERSHIP STRUCTURE

Radom

Łódź

100%Polish Airports State Enterprise (PPL)

95.65%City of Łódź

4.35%Łódź Voivodeship

<0.01%Polish and Łódź flying clubs

No-traffic airport, planned expan-sion as a low-cost and charter replacement for traffic moved from Chopin Airport.

Low-cost airport used by Ryanair, served by Lufthansa.


In 2018 the two main Warsaw agglomeration airports served 20.8 million pas-sengers in total, constituting 45.5% of all passengers using Polish airports. Łódź airport handled 221,000 passengers and was one of the smallest active airports in Poland, only ahead of Szymany, Zielona Góra-Babimost and Radom (passenger number data from the Civil Aviation Authority).

Chopin Airport handles the vast majority of air traffic in the Warsaw region; in 2018 it served 17.8 million passengers, and Modlin only 3.1 million. LOT remains the main airline serving Chopin Airport; in April 2019 it offered over 1,100 scheduled departures weekly (69.5% of all departures from the airport) and 128,000 weekly seats (60.5%). LOT is also the only airline offering one-ticket transfers through the Warsaw airport. Currently about half of LOT passengers only transfer in Warsaw, which, taking into account the share of the flag carrier in airport traffic, means that almost 30% of travellers in Warsaw are transit passengers, brought to Poland thanks to LOT’s connection network and flight offers.

Agreements with other airlines allow LOT to also offer transfer tickets for other hubs on different continents.

Besides LOT, Chopin Airport is also served by numerous full-service carriers offering feeder flights to their hubs, where passengers from Warsaw can transfer to other flights. Seat supply data clearly show that the most critical transfer hubs for Warsaw passengers are in Germany (Frankfurt and Munich), served by Lufthansa. LOT, often contrary to its own interests, plays a role of feeder carrier for these hubs due to its membership in Star Alliance. Other significant transfer hubs are Paris, London, Amsterdam (the latter two are also important destinations due to economic migration), Moscow and Doha. Despite the smaller number of flights, Dubai also plays a significant role due to the large Emirates route network in Asia, Africa, and Australia, as well as competitive prices offered by the airline.

partner airline hub connections description

United Chicago-O'Hare 17 domestic routes in USA

ANA Tokyo Narita 3 domestic routes in Japan

Aeroflot Moscow Sheremetyevo 4 domestic routes in Russia

Air Canada Toronto 9 domestic routes in Canada

Singapore Airlines Singapore 16 routes: 6 to Australia, 2 to Vietnam, 8 European

Turkish Airlines Istanbul Ataturk 3 routes: one in Turkey, two in the Middle East

LOT CONNECTIONS OFFER USING GLOBAL HUBS


Źródło: ch-aviation

LARGEST HUB AIRPORTS IN EUROPE AND THE MIDDLE EAST IN 2017

London-Heathrow (LHR)British Airways, Virgin Atlantic78 mn33/6,002North America

London-Gatwick (LGW)British Airways, Virgin Atlantic, Norwegian45.6 mn4/714North America

Amsterdam (AMS)KLM68.5 mn42/5,565North America

Frankfurt (FRA)Lufthansa64.5 mn49/7,128North and South America

Rzym-Fiumicino (FCO)Alitalia41 mn12/2,318South AmericaMadryt (MAD)

Iberia53.4 mn7/1,302South America

Paris CDG (CDG)Air France69.5 mn42/6,787North and South America, Africa

Airport (Code)Base carrierNumber of passengers in 2017Number of connections from Warsaw per week (airlines)/ Number of seats per week from WarsawMain transfer destinations

Barcelona (BCN)Vueling, Norwegian47.3 mn8/1,620–

Source: ch-aviation, ACI World.

Rzym-Fiumicino (FCO)Alitalia41 mn12/2,318South America

Istanbul Ataturk (IST)Turkish Airlines63.8 mn12/1,821Asia, Africa

Doha (DOH)Qatar Airways35.3 mn16/4,478Asia, Australia, Africa

Moscow Sheremetyevo (SVO)Aeroflot40.1 mn35/4,796Asia

Munich (MUC)Lufthansa44.6 mn42/5,428North and South America

Dubai (DXB)Emirates82.2 mn7/2,928Asia, Australia, Africa

Chopin Airport also serves a large part of the low-cost traffic to and from Warsaw. It is an aircraft and crew base for Wizz Air, which offers 149 departures (9.0%) and 31,500 seats (14.8%) per week. The main Warsaw airport also handles charter (largest carriers Enter Air, Travel Service and Ryanair Sun) and cargo traffic (both using freighter aircraft of UPS, DHL, FedEx, etc, and passenger aircraft).

Modlin airport is served by only one scheduled flight operator, the Irish low-cost carrier Ryanair, offering 184 departures per week.

Łódź and Radom airports currently play no role in serving the Warsaw agglomeration; however, this may change for Radom after implementation of the Polish government’s investment plans and shifting, perhaps by administrative traffic division, of a portion of low-cost and charter flights from Chopin Airport.

Both Warsaw agglomeration airports will be unable to meet the growing demand for flights without expansion.

The theoretical capacity of Chopin Airport is around 22 million passengers per year, but this number is not attainable in practice as it would require an even distribution of flights during the day and almost perfect operational efficiency of air traffic control. In reality, hub airport traffic occurs in waves, as a carrier tries to minimize connection times (an essential part of its competitive advantage). Thus an airport might be empty for part of the day but overcrowded and without growth potential during peak hours.


Additionally, other than the maximum serviceable number of passengers, traffic structure is also important. Chopin Airport does not have enough wide-body air-craft stations, and its non-Schengen traffic zone (serving all long-distance flights, as well as the UK, Ireland and Ukraine) is too small, as it was not designed as a large hub airport. Shortage of staff in ground handling companies, lowering the capacity of the baggage handling area, loading and pre-flight maintenance, is an additional limitation. Currently, during peak hours, especially in the summer season, Chopin Airport is overcrowded, flights are often delayed, and travel comfort is very low. The layout of two runways crossing in the middle also complicates operational efficiency.

Chopin Airport’s expansion capabilities are limited mostly due to lack of space, especially in the critical non-Schengen zone, which almost adjoins the millitary area of the airport. The poorly planned route of the Warsaw ring road (S2 expressway) makes it impossible to construct a third runway, parallel to one of the current ones, which would significantly increase the capacity of the airport. Noise is also a severe limitation, as densely populated districts of Warsaw surround the airport.

The situation of Modlin airport is even worse, as in 2018 it exhausted the possi-bility of serving additional passengers. Capacity limitation mostly concerns the terminal. According to various estimates, the terminal can handle from 3 to 4.5 million passengers (in 2018 traffic was 3 million). Even with the most optimistic

WARSAW AGGLOMERATION AVIATION MARKET

number of seats offered

per week (one-way)

departures per week

share

total

share

, , , , , ,

, ,


forecasts regarding passenger service, even with 3 million passengers the termi-nal is crowded and comfort is low. According to an ARUP analysis (Bujnik 2016), with this level of traffic the terminal should have an area of 25,000–30,000 m2, but its area is only 12,500 m2. Lack of free space also limits the growth of retail, which is the foundation of profitability for many low-cost airports. The airport infrastructure does not currently constitute a short-term limitation, but in the perspective of several years a major renovation or construction of a new runway will be required.

Polish air traffic growth forecasts

Globally air traffic shows medium- and long-term resilience to changing economic conditions. Statistically, the number of passengers all over the world doubles every 20 years. Currently it is difficult to identify any factors that could slow this trend, although it could be affected by climate change (more irregularities caused by extre-me weather phenomena), regulations (such as a ban on short-distance flights) and, most importantly, lack of available airport and airspace capacity in Europe, North America and East Asia.

traditional low-cost

, , , , ,,


In Poland, the Civil Aviation Authority forecasts a stable increase in the number of air passengers. The forecast updated in 2017 predicts that in 2020 the number of passengers should reach almost 50 million (but data for 2017 and 2018 show that these estimates could be too low, as the growth rate is exceeding the forecasts). The next decade, as the market saturates, should prove a slowdown in growth dynamics, from 8% at the end of this decade to less than 4% in the next one.

According to a forecast by Eurocontrol, the European airspace control authority, until 2040 the number of aviation operations in Poland should grow by 1.9% per year on average. This means that in this period the number of daily flights in Polish airspa-ce should rise by over a thousand. Even in the most pessimistic scenario, this means that 50,000 flights per year will not be operated due to lack of airport and airspace capacity. In the case of fast growth of global aviation, the capacity gap could exceed 200,000 flights per year. The same forecast claims that Chopin Airport would beco-me one of the top 15 most crowded European airports, with flights delayed by 15–20 minutes just due to lack of capacity.


Lack of free capacity of European airports may keep 160 million passengers from flying in 2040.

20180 0

20 2

40 4

60 6

80 8

100mn

10%

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

FORECAST OF AIR TRAFFIC GROWTH IN POLAND

number of passengers in Poland (left axis)

annual growth rate (right axis)

Source: CAA.


Impact of aviation on the economy of Poland

According to the latest Eurostat data, in 2016 the aviation industry in Poland encom-passed 1,032 companies, the largest number of companies since collection of such data began. This figure was made up by 442 companies servicing air transport of passengers, from the Polish flag carrier LOT Polish Airlines to local flying clubs, 74 air freight companies, and 516 companies supporting air transport: airports, air traffic control, and ground handling services for passenger and cargo transport. Altogether they generated turnover of PLN 10.6 billion while employing 14,500 people. Interestingly, despite the increase in the number of companies and steady growth in turnover, the number of employees in this industry has fluctuated around 15,000, with 2012 as the record year, with 16,500 people employed. This is arguably a result of the rising cost-effectiveness of the industry, as well as outsourcing of services. A significant fraction of workers switched to self-employment (resulting in a nearly tenfold increase in the number of companies in the last decade), while some of the most basic services, such as airport security and maintenance, have been subcontracted to companies from outside the industry.

0 02008 2009 2010 2011 2012 2013 2014 2015 2016

200 2

400 4

600 6

800 8

1,000 10

1,200 12

PLN bn

15.714.7

1615.6

16.5

14.313.1 13.4

14.5

turnover (right axis)

*classes: PKD 51.10 (passenger air transport), 51.20 (freight air transport), 52.23 (air transport support activities)

Source: Eurostat, own calculations.

number of companies (left axis)employment (thousands)

POLISH AVIATION INDUSTRY* SIZE


The aviation industry is one of the most efficient sectors of the Polish economy. One person employed in air passenger transport creates up to PLN 600,000 of added value, six times the average for Poland. Ground handling is the least efficient, creating around 2/3 more added value than the rest of the economy. As a result, the aviation industry’s share in the economy is 0.3%, while it employs only 0.1% of all workers. The share of the aviation industry in the whole logistics sector, including warehousing and pipeline transport, is an astounding 6.7%, but the largest part falls to road transport.

There are also a number of companies operating in the direct vicinity of the aviation industry. These are airport shops, security and maintenance companies, transport companies moving passengers to airports and aircraft, as well as entities servicing and maintaining aircraft, from fuelling to de-icing. Additionally, there are companies cooperating with the aviation industry, not directly related to air transport but making it possible. These are IT companies guaranteeing the func-tioning of computer systems, fuel and energy companies, food and beverage firms supplying catering, as well as employment services companies allowing replenish-ment of the workforce.

Source: Eurostat, GUS, own calculations

3,886

PLN 2,326 mn

PLN 598,000

525

PLN 188 mn

PLN 357,000

10,055 1.8%

6.7%

18

0.1%

0.3%

103

PLN 1,670 mn

PLN 166,000

employment

added value

added value per

person

passenger air transport

freight air transport

share of total transport and warehousing

share of total

economyair transport support

activities

POLISH AVIATION INDUSTRY STRUCTURE AND CONTRIBUTION TO THE ECONOMY

Aviation industry employees create six times more added value than the average for the Polish economy.


Based on a survey conducted as part of an InterVISTAS study (2015), we estima-te that thanks to the Polish aviation industry, related companies employed 28,000 people in 2016 and created PLN 3.9 billion in total added value. For obvious reasons, this industry sector is not as productive as air transport companies themselves, and each employee there creates PLN 138,000 in added value per year.

An aspect often included in studies on the effect of the aviation industry on the economy are so-called multiplier effects. Due to the high added value generated by employees in this sector, as well as related high salaries, consumption of people employed in the aviation industry and investments of companies belonging to this industry have a significant impact on GDP. According to our estimates, such expen-ses raise GDP by PLN 3.3 billion (0.2%) and create 19,500 jobs in other sectors of the economy not related to the aviation industry in any way.

By aggregating information on the size of the aviation industry, companies ope-rating in its direct vicinity, and the scale of multiplier effects, we have calculated that the aviation industry was responsible in 2016 for PLN 11.4 billion of added value to the economy, i.e. 0.7% of Polish GDP. This is much less than the European average (1.5%) but twice as much as the industry’s contribution to GDP at the beginning of this decade. Companies operating air transport on islands and in smaller countries – Malta (5.1% of GDP), Luxembourg (4.7%), Cyprus (3.9%) and Iceland (3.7%) – have the greatest impact on their economies, which is understandable due to the tremendous significance of air transport for such countries.

Another, less tangible mechanism of the aviation industry’s influence on the economy is increasing the economic potential of the region where the airport ope-rates. This has a proven effect on a number of aspects of economic activity, from catalyzing international trade of exceptionally high unit-value goods (high tech), fostering an influx of new investments, especially foreign ones, and increasing the ability to attract world-class specialists, to a stimulus for growth of recreational and business tourism. According to an InterVISTAS study from 2013, Polish airports increased national GDP by 3.4%. Taking into account the growth of air connections between Poland and other countries, as well as the extremely rapid growth of regio-nal airports, we estimate that in 2017 this influence was as large as 5%, twice the EU average (2.6% of GDP). This number is realistic, considering that availability of air transport is much crucial for developing countries and regions with low GDP than for those with high GDP per capita, where global business centres are located.

IMPACT OF AVIATION ON THE POLISH ECONOMY

28,000

PLN 3.9 bn PLN 3.3 bn PLN 11.4 bn 0.7%

19,500 62,000 0.4%14,500

PLN 4.2 bn

employment

added value

direct impact indirect impact multiplier effects total % of total economy

Source: Eurostat, InterVistas (2015), own estimates.

The aviation industry was responsible in 2016 for PLN 11.4 bn of added value to the economy, i.e. 0.7% of Polish GDP.


The data presented in the previous chapter clearly indicate that the current airport infrastructure in central Poland will in the medium-term perspec-tive be insufficient for serving the projected air traffic. Even if all planned investments at Chopin Airport are implemented, Modlin’s ability to grow is unblocked, and Radom is adapted to serve schedu-led flights, the capacity of this group of airports will be exhausted, depending on the traffic growth rate, after 2022–2025. At the same time, there are no doubts that overcrowding of airports and inability to meet demand for flights will negatively impact the development rate of Poland, as well as reduce the country’s political importance.

Decisions on the expansion of Polish airports are at least five years late – they should have been made before 2013.

Scenarios for central airports


This means that central Poland requires prompt decisions on infra-structure expansion. Even in the most optimistic scenario, overcrow-ding of airports cannot be avoided due to the time needed to build new infrastructure. However, making proper decisions anchored in market reality, and successful implementation, independent of cur-rent politics, will allow minimisation of negative consequences in the short term, while contributing to Poland’s economic growth and poli-tical position in the long term.

Among many analysed scenarios, there are four main ones:a) construction of the Central Transport Hub while maintaining

current airports in central Poland;b) construction of the Central Transport Hub with shutdown of

Warsaw Chopin Airport; c) further expansion of the Chopin and Modlin airports (duoport);d) complementing Chopin and Modlin airports with the Radom

Airport (duoport+).Despite existing controversies regarding the idea of CTH construc-

tion itself, the assumption that its development will proceed serves as the starting point for further analysis. Due to this, scenarios c) and d) will not be analysed. They should be treated as necessary provisional solutions, not permanent ones.

This assumption is the effect of the political will and determina-tion of the Polish government to continue the construction of CTH. This decision has already been made and won’t be retracted at least until the government changes. On the other hand, it is also a result of objective limitations on further development of the existing airports, primarily related to lack of space around Chopin Airport, as well as the environmental and noise-related circumstances of that facility. The authors are aware of divergent opinions regarding CTH construction, but the following part of the report does not ask “if” CTH should be constructed, but “how” to do it in order to maximize benefits and minimize risk.

An issue critical for further analysis is the decision on the future of Chopin Airport, as currently it serves the vast majority of Warsaw agglomeration and central Poland air traffic. Due to this, the general scenarios described below focus on the relationship between CTH and Chopin Airport. The future of the Modlin airport and, especially, the Radom airport still under construction, is not the most critical challenge related to CTH construction. However, the fate of the two smaller airfields will have a significant impact on specific decisions regarding the new projects, related for example to the planned traffic structure and the presence (or absence) of low-cost carriers at CTH.

Central Transport Hub replaces Chopin Airport

In the first variant, when CTH opens the existing Warsaw Chopin Airport will be closed to passenger and cargo traffic. (It could still function as a military or executive airport, serving business traffic using private planes.)

Such a scenario would require all carriers currently flying to War-saw to switch to the new airport or abandon serving the Polish capital.

• consolidation of traffic at one airport

• identical conditions for all airlines: base LOT and other non-base airlines

• avoidance of environmental and noise limitations

• higher investments in logistics and business centres in the vicinity of CTH

• construction of a modern and efficient hub airport, attractive to passengers and carriers

• possibility of reusing the conveniently located Chopin Airport area

• using the aviation component of CTH as a spur to address overdue rail inve-stments

• worse access to the airport in compa-rison to Chopin Airport, lesser appeal of traffic to/from Warsaw

• project delays requiring interim solutions

• feasibility of new airport depends on LOT’s condition and development plans

• limitation of growth of Warsaw as a business centre

• shutdown of conveniently located Chopin Airport

• no time for return on investment in Chopin Airport expansion

• lesser appeal of CTH as a workplace, difficulties with acquiring tens of thousands of required employees

• lower growth rate of investments in Warsaw, and exit of some hotel investments from the capital

STRENGTHS

OPPORTUNITIES THREATS

WEAKNESSES

SWOT ANALYSIS

CTH and Chopin Airport active concurrently

In the second scenario, launch of CTH does not lead to the shutdown of Chopin and Modlin airports. In this case, there are three large airports active in central Poland (or four if the Radom Airport development plan is implemented).

Regardless of keeping Chopin Airport active (in a reduced form, for example), LOT would move its flights to CTH in this example, as the new hub is necessary for the airline to implement its development plans. However, other carriers would have a choice. Limitations could be introduced at Chopin Airport, regarding for example the size of aircraft or number of flights. This would allow better manage-ment of the airport, but in practice, Chopin Airport and CTH would compete with each other to a degree.

• preservation of active Chopin Airport, with convenient location and transit near Warsaw business centre

• utilisation of current access infrastruc-ture, with full return of investment in Chopin Airport

• easier development process (lower risk related to CTH delays)

• use of Chopin Airport for high-margin flights to and from Warsaw (not transit flights)

• precise traffic management and addi-tional spare capacity, simplifying avia-tion expansion planning

• larger capacity of CTH for LOT with potentially lower construction costs (due to the lower amount of traffic from other airlines and building the airport with LOT in mind)

• creation of logistic and business centre in the vicinity of CTH

• LOT’s position weakened by carriers staying at Chopin Airport, closer to the city and preferred by passengers

• lowering of CTH traffic below the break-even point due to competing with Chopin Airport

• need to manage two large projects – Chopin Airport expansion and CTH – simultaneously

• further diversification of traffic in Warsaw agglomeration, lowering travel convenience and transfer possibilities

• prolongation of return of investment in CTH (due to lower traffic)

• further pollution and noise in Warsaw, and inability to reuse the Chopin Airport area

STRENGTHS

OPPORTUNITIES

THREATS

WEAKNESSES

How to build CTHConstruction of an airport is a multi-year process, where critical decisions are made at the early design stage. Terminal architecture, aviation infrastructure layout, as well as airport financing and management model, all affect its later success as a transfer hub.


HUB AIRPORT SUCCESS FACTORS

Impact: Hubs situated on main air traffic routes have the highest potential to succeed, as passengers don’t need to make detours.

CTH situation: Central & Eastern Europe is conveniently located when it comes to transfers to two rapidly growing markets: Asia–Europe and East Asia–North America. The location of CTH will enable flights to Central Asia with cheaper medium-range airplanes.

Location

Base carrier

Connection time

Impact: A hub is attractive only when it allows numerous connections to various destinations.

CTH situation: The current growth prospects of LOT are excellent, which makes building a connection network simi-lar to current midrange hubs (such as Vienna, Copenhagen or Munich) more probable.

Impact: The shorter the minimum connection time (MCT), the more attractive a hub is. This factor is influenced by the flight schedule of the base carrier, terminal design, and efficiency of security checks, baggage handling etc.

CTH situation: CTH will be a newly-designed airport, so it can be designed with a maximum reduction of connection times in mind: 30 minutes in the Schengen zone and about 60 minutes when border control is required.

Airport attractiveness

Aviation infrastructure

Impact: For some passengers, especially in case of longer connection times, the airport itself may be a factor when choosing an airline – a terminal with numerous shops, restaurants, attractions, and hotels appeals to travellers.

CTH situation: CTH may become an airport attractive to passengers, but due to higher construction costs in Poland in comparison to Asia and the Middle East, attempts to match airports such as Singapore or Dubai seem unrealistic.

Impact: In the case of hub operations, timeliness (depen-dent on runway and taxiway layout, as well as ground han-dling and air traffic control efficiency, etc) is very important.

CTH situation: The Polish Air Navigation Services Agency is already preparing to increase the efficiency of air traffic management. Constructing an airport from scratch allows rational design of aviation infrastructure. The most signifi-cant challenge will be the quality of ground handling, depen-dent on employees not currently present on the market.

Even the largest hubs serve mostly local traffic – the share of transit passengers rarely exceeds 50%.


What will be the influence of market changes on CTH?

City access

Impact: Even the largest hub airports also function as important gateways to the cities they serve—at most of them, the share of local traffic exceeds 50%. Transit between a hub airport, usually located quite far from the city centre due to noise and environmental issues, and the city centre is one of the critical factors for an airport’s appeal for local passengers.

CTH situation: As an airport located around 40 km from the Warsaw city centre, CTH is dependent on accompanying development of land infrastructure (especially rail). The airport will become an attractive site serving Warsaw only if transit time from the centre does not exceed 30 minutes.

Due to the time-consuming nature of the CTH design and con-struction phases, as well as the long period to recoup the invest-ments, it is necessary to place the project on the map of market trends influencing the probability of success of such an ambitious undertaking.

Besides trends directly related to the aviation industry, discus-sed above, CTH will be influenced by broader geopolitical changes, such as the future of the Schengen zone and the European Union, as well as Polish and regional economic trends.

Boundaries between low-cost and full-service airlines on the Euro-pean aviation market are becoming more and more blurred, espe-cially in the short-distance flight segment. Low-cost carriers are currently offering (although not widely yet) transfer tickets not only inside their connection network (Ryanair, for example) but also in cooperation with other airlines, including full-service ones (e.g. easyJet). They have also introduced special offers for business passengers and foregone serving secondary airports (located fur-ther from cities) in favour of primary airports. The long-haul low--cost flight model is also gaining popularity (in Europe it is offered by Norwegian and Eurowings, among others).

On the other hand, full-service carriers increasingly offer servi-ces imitating low-cost carriers—without checked baggage and in-flight meals included in the ticket price. They have also been creating subsidiaries aimed at competing with low-cost airlines.

THE CHANGING ROLE OF LOW-COST AIRLINES

TREND 1

Building an airport is not difficult. The difficulty lies in constructing a good airport.


Due to these changes, we hear more and more often of hybrid airlines. In Europe, one example is the Irish Aer Lingus, owned by IAG. Norwegian also blends low-cost and full-service airline models, for instance flying through its own hubs. In the short-term perspective, low-cost airlines (owned by groups or independent) will probably take over an increasing number of short-distance European routes.

A hub airport is always strongly dependent on its base carrier, as it is the only airline to fully utilise aviation and passenger infra-structure designed with connection optimisation in mind. In the case of CTH, unless a new company aspiring to this role is created in the next few years, LOT Polish Airlines is the only possible base carrier. If LOT were acquired by an aviation group, the new owner could also make CTH its hub.

Are low-cost carriers going to fly to CTH?

If YES, it is necessary to construct infrastructure meeting the needs of such airlines: simpler, cheaper in operation, but highly efficient. Low-cost carriers can be served in the same or a separate terminal.

Are full-service airlines still going to operate short-distance flights themselves?

If YES, the terminal design must be prepared in close cooperation with the base airline (LOT) and be tailored to its needs, allowing the simplest possible connec-tions in its connection network.

If NO, the same coordination with a larger number of airlines will be required, including possibly also rail and bus lines that can transport passengers for example on domestic routes – they should also be provided the most convenient connections.

Amid pressure to lower airport charges, will airports profit mostly from retail activities?

If YES, the terminal design must include extensive commercial infrastructure, as well as office buildings and hotels. At the same time, it should be constructed in cooperation with the base carrier and retail sector, to maximise the conve-nience of travel.

EXPANSION OF LOTTREND 2

Is LOT going to reach the planned increase in passenger numbers?

If YES, the Polish carrier will be able to fill CTH on its own. In such case, the airport should be constructed with some room to grow, in order to secure free capacity for some years after its launch.


Development of new types of wide-body aircraft, such as the Boeing 787 Dreamliner and the Airbus A350, as well as narrow-body ones (Airbus A321neo, Boeing 737 MAX 8), enables the launch of new direct flight routes that were not profitable before due to aircraft size or distance limitations. More direct flights mean fewer transfers at hubs and a larger number of flights between secondary airports. Expansion of long-haul low-cost airlines is part of this trend.

Overcrowding of European hubs, losing market share to rapi-dly growing airports in Asia and the Middle East, is an additional factor. The launch of the new Istanbul airport, construction of the Dubai hub and expansion of Qatar Airways are why a large number of passengers travelling between Europe or North America and Asia choose a transfer in the Middle East, not the European Union.

If NO, assumptions regarding the size of CTH should be reviewed and possibly lowered, in order to avoid rescaling of the airport.

Is LOT going to enlarge its long-distance fleet

If YES, the airport needs to be designed adequately in terms of the number of positions for wide-body aircraft, transit area efficiency and border control capa-city. The inefficient and too small non-Schengen zone at Chopin Airport is one of the main factors blocking LOT’s expansion.

Is LOT still going to serve domestic routes?

If YES, it is necessary to adapt the airport infrastructure and terminal design for the fastest possible transfers from small planes, often located at positions far from the terminal.

If NO, domestic routes will be replaced by rail connections, so it will be necessary to adapt the terminal to fast intermodal transfers.

CHANGING IMPORTANCE OF HUBSTREND 3

Are direct flights going to replace hubs completely? If YES, this will negatively impact CTH traffic and change its profile (lowering the number of transit passengers). In the case of LOT, potential launch of direct long-distance flights from airports in Central & Eastern Europe (Budapest, Bucharest, Prague, Kiev, etc) by new airlines would have the most significant impact.

Are existing hubs going to be expanded?

If YES, this will worsen the competitive position of CTH, forcing it to compete with expanded and established hubs. Expansion of existing airports – provided regulatory issues are resolved – is also faster than building a Polish hub from scratch. Thus, any development of European and Middle Eastern hubs will indi-rectly limit the growth potential of CTH.


Forecasts show that Asia and Africa are the fastest-growing aviation markets, but in the case of Africa this is mostly due to the low base level and severely underdeveloped network of intracontinental connections.

Is the Asian market going to grow at its current rate?

If YES, CTH will be one of the best-located hub airports. The airport design should take into account the preferences of Asian passengers (such as honouring Chinese payment cards).

If NO, CTH may lose one of its main competitive advantages, leading to a decre-ase in traffic served.

Are short-distance flights still going to be operated?

If NO, the airport design needs to take into account alternative ways of transpor-ting passengers, especially rail. It also needs to be ready for a relatively simple and cheap way to expand the terminal to include autonomous air taxis or a hyperloop.

Is there going to be an increase in traffic to new destinations, such as Africa and Central Asia?

If YES, CTH’s role will depend on destinations where demand is growing the fastest. Should these be Eastern markets, LOT and CTH may benefit from the convenient location and play a significant role. In case of faster growth of, for example, African or Latin American markets, traffic will move to hubs located more conveniently, such as Lisbon, Rome, Madrid or the Middle East.

NEW PASSENGER FLOW DIRECTIONSTREND 4

CTH will increase Polish GDP by 3.2% during construction.

Will the EU remain a competitive transfer location?

If YES, this will strengthen the potential of CTH as an airport with an optimal geographical location for transfers to and from Asia.

If NO, for example due to more and more strict environmental or social regu-lations lowering the profitability of European carriers, this will limit transfer traffic through CTH.


Potential gains and losses of the Polish economy

Expansion of aviation infrastructure has a dual effect on the economy. In the short term it stimulates demand, especially for construction and installation services, as well as manufacturers of raw materials required for construction of airports and related transit routes. In the long term, construction of an airport expands economic potential, fosters the growth of investments, and catalyzes international trade, especially in highly processed goods.

The impact of CTH construction on demand in the economy is relatively easy to determine. According to government estimates, all investments related to the airport will total some PLN 35 billion, with the aviation component taking up to PLN 16–19 billion (USD 4–5 billion). This equals 2% of Polish GDP, based on 2017 prices. Such a demand stimulus will spill over to various sectors of the economy (secondary effects) and cause relatively strong multiplier effects (increase in con-sumption and investments in other sectors). We estimate that it should additionally increase GDP by PLN 20.1 billion (1.3%), with PLN 13.5 billion in secondary effects, visible especially in the sectors of construction, trade and construction materials processing (cement, concrete, asphalt and steel). Another PLN 6.6 billion will be generated by multiplier effects, distributed evenly across the whole economy and not limited to the central voivodeships. In total, the demand effects of CTH con-struction should raise GDP temporarily by 3.2%, supplying a significant growth impulse, especially during the nearing economic downturn.

It’s much more difficult to gauge the impact of CTH construction on the deve-lopment of Poland in the long term, as it depends on both the economic growth of the country and the success of the project itself. What is more, econometric studies (Mukkala, Tervo 2013) show that these two factors are connected recursively. Air traffic scale strongly depends on the economic development of the region where the airport is located, but at the same time the construction of the airport stimu-lates the development of the vicinity, especially in the case of regions with a low starting GDP. Thus airports serve as triggers for economic potential, meaning that they don’t stimulate growth when they are constructed in economically barren regions or their construction does not increase the number of connections availa-ble to passengers from the region (Button, Soogwan, Junyang 2009). This lack of positive economic effects of new airports has a scholarly name (the Appalachian Effect), and numerous examples, such as Mirabel Airport near Montreal, Canada, can be offered. 31

From the macroeconomic perspective, to ensure the long-term benefits of CTH construction it is necessary to fulfil at least two boundary conditions. First, the CTH airport must be included in the ground transport network (both passenger and cargo). Transfer time to the centres of Warsaw and Łódź cannot be longer than 30 minutes for the airport to serve business and tourist traffic from both cities. Short transit times will also ensure optimal availability of a cheap workforce, as the job market in the immediate vicinity of the airport is too small to mitigate the shortage of employees without the need to significantly increase salaries. This factor is even more important in light of the very low mobility of the Polish

3. Montréal–Mirabel Airport, about 40 km from Montreal, was opened in 1975 and was supposed to replace the existing Montréal–Dorval Airport, but because of poor access and continued operation of the old airport, airlines didn’t want to move to the new airport. Since 2004, Mirabel has hosted only cargo flights and the Bombardier manufacturing plant. The main airport for the city remains Dorval (Montréal–Pierre Elliott Trudeau International Airport).


workforce compared to other EU members. Initial estimates show that CTH and all its subsidiaries may require 100,000 or more employees, from low-skilled workers to specialists, such as aircraft technicians, air traffic controllers etc.

What is more, one of the main factors of CTH’s economic success is the future of Chopin Airport. Maintaining its current functionality would definitely decrease the macroeconomic benefits of CTH, as it would endanger the development of the new airport – airlines would not be eager to move to the new facility farther from the city and viewed as less convenient for passenger access.42On the other hand, full shutdown of the existing airport could endanger the development of Warsaw itself. Currently the capital of Poland is one of the fastest-growing business cen-tres in Europe, thanks among other factors to the convenient transit offered by Chopin Airport. Additionally, in the vicinity of the airport there is significant hotel and transport infrastructure. Shutdown of the airport would mean retiring these projects, with a total value of billions of zloty and employing some 10,000 people. These risks could be minimized in the case of a very well-designed CTH transit connection to Warsaw business centres, with transit taking no longer than now, 25–30 minutes (although it would not be possible to avoid the negative impact on the local economy in the vicinity of Chopin Airport). At the same time, total shutdown of the existing airport would create a chance to redevelop this part of Warsaw, ensuring both a short-term development stimulus and, in the long term, a chance to create high-quality public spaces and new jobs. During the transition period, after shutdown of Chopin Airport but before the redevelopment is finished, there would be negative economic consequences.

It is also open to discussion if it’s possible to use regulatory and operational means to construct a traffic model for Chopin Airport eliminating the competition with CTH and providing added value to the economy. If so, the airport could still serve business passengers, preferably only on Schengen area routes, as a destina-tion airfield. Limiting the size of the airport would still allow urban development projects, for example through demolishing part of the terminal, the cargo termi-nals, or one of the runways.

If both of these conditions were met, the macroeconomic benefits of CTH con-struction would be definitely positive and felt by many sectors of the economy, Firstly, CTH construction would definitely improve the significance of the region as a European logistics hub. Even now there are a large number of warehouses, distribution centres and freight centres in the area between Warsaw and Łódź. Launch of CTH, with transactional costs of air freight much lower than Chopin Airport, as well as a smaller distance from distribution centres, would speed up the development of intermodal trade in the region, especially in the case of highly processed goods. Air transport is responsible for 35% of global trade measured by value, but only 0.5% measured by volume (ATAG 2016).

Secondly, a well-connected and constructed airport would allow a large incre-ase in the volume of air passenger travel to and from the region, as well as serving the growing number of people changing flights in Poland. Looking at the scena-rios described in the first chapter, this would mean that the launch of CTH would significantly decrease the capacity gap, i.e. the inability to meet the demand for

4. Passenger perception is crucial in this respect, as an airport located far from the city may be perceived as less convenient even when access to the airport takes about the same amount of time. A good example is the airports in the London region: travel time from the low-cost Luton and Stansted to the city centre is only slightly longer than from the principal airports of Heathrow and Gatwick, but these two groups of airports are perceived very differently.


flights due to the lack of free airport capacity. Estimates claim that in 2040 Euro-pe will be unable to serve 160 million passengers—but CTH could serve as many as 50 million travellers that year. This would mean some 120,000 additional jobs in the aviation industry and related sectors, as well as 400,000 additional jobs in other sectors of the economy. In total, CTH construction would mean a permanent increase of demand in the Polish economy by 4.5% of GDP.

Thirdly, CTH construction would also contribute to development of the Mazo-vian voivodeship. The vicinity of the airport would probably see the creation of a science park and a business centre for companies with foreign capital. Adding these three elements together, we can estimate that in an optimistic scenario of full CTH functionality, the share of the aviation industry in the Polish economy would rise to around 7% of GDP—one of the highest levels in the European Union. At the same time, should these boundary conditions not be met, construction of the airport would decrease the medium-term competitiveness of the Polish economy by slowing the economic growth of Warsaw and causing stagnation of air traffic in the region, instead of increasing it.

Construction of a new hub airport in Poland is not an engineering challenge, espe-cially in comparison to similar projects in other regions, such as Asia, where new airports are often constructed on artificial islands or difficult terrain. The challen-ging aspects will be environmental (including noise-related) limitations, as the EU regulations are much stricter than the legal frameworks in Asia or even the United States. This is one of the issues behind the lack of investment in new aviation infra-structure in Europe. A great example is the still unapproved construction of a third runway at the extremely overcrowded London Heathrow.

Who is going to pay for CTH construction?


POTENTIAL CTH FINANCING SOURCES

European Union

Commercial investor (infrastructure fund or other)

The European Commission objects to devoting EU funds to aviation projects, espe-cially construction of new airports. Large airports are usually profitable, so they don’t require subsidies and, according to the Commission, should be financed by private investors. There is no chance for financing the air component of CTH until 2020 and that is unlikely to change later. The EU might however subsidize some supporting investments, especially rail-related.

Large airports are profitable enterprises, with a high return on investment. Even if the forecasts for the rate of air traffic growth in Poland and CTH itself turn out to be overstated, the airport operator should definitely profit – even with the current traffic volume at Chopin Airport, PPL can show stable profits. Commercial inve-stors are interested in the project and could finance the whole project or part of it in exchange for a share in the operating company.

PROBABILITY: minimal

PROBABILITY: medium

Financing the project from the state budget is the simplest solution in terms of organization, as it does not require obtaining an external partner. With construc-tion costs spread over the planned 8-9 years, the air component expenses would not exceed PLN 2 billion per year. The state budget could bear such an expense, although it would be a significant burden. Financing the project from the budget is risky, however, due to the lack of experience in such complex development projects, as well as the significant costs.

PROBABILITY: medium

State budget/Polish Airports State Enterprise (PPL)


PROBABILITY: very high

PROBABILITY: minimal

Airline

Industry investor (especially from Asia)

A carrier – most likely LOT – will definitely not finance the construction of the whole airport, due to the cost. It can however participate in financing of the pas-senger terminal. At the same time, cargo carriers could pay for the construction of cargo handling infrastructure. This financing model is quite popular (Lufthansa is a co-owner of the terminal in Munich, for example), but in the Polish reality the probability of such a solution is limited due to the modest cash reserves of LOT and more urgent investments in its fleet.

Hybrid models of CTH aviation component financing are also possible. Cooperation of commercial and professional investors seems most likely – the former providing financial means and the latter know how – in exchange for the opportunity to manage the airport.

An industry investor could be an existing airport operator – the companies operating airports in Singapore, Hong Kong, South Korea, Japan and Taiwan seem the most likely candidates. European entities, such as Vinci, Aéroports de Paris and Fraport, seem less likely. Such an investor could offer knowhow for designing, constructing and managing a hub airport, critical to CTH’s success. This makes such partners the most attractive. In exchange for an investment they would probably expect a concession to operate the airport after its opening.

PROBABILITY: high

Chinese investor

Chinese capital (industrial and commercial) is very interested in European infra-structure projects, and CTH is one of the most important ones, also in the context of the Belt and Road Initiative. The availability and costs of such financing are not an issue, and some Chinese professional investors could also provide the necessary knowhow. However, such financing is the most risky in terms of geopolitics, as Chi-nese investors attempt to take over the market, often deliberately leading recipients of financing into a debt trap.


CTH – legal perspective

CTH Act

The Central Transport Hub Act of 10 May 2018 (Journal of Laws 2018 item 1089), regulating critical issues regarding preparation of the construction of CTH and supporting projects, entered into force on 21 June 2018.

Adopting a special act devoted to a large infrastructure project may be controversial, as it allows significant devia-tions from the basic procedures set forth in the Admini-strative Procedure Code, but experience shows that special legislation can significantly expedite such projects.

At the same time, the special act introduces a number of distinct procedures, different from the general regula-tions in force:• it simplifies administrative proceedings, such as obtaining

licences, abandoning the standard procedure described in the Administrative Procedure Code;

• it changes the method of real estate management, cre-ating a special regime (lex specialis) in relation to the Property Management Act;

• it provides specific solutions for implementation of sup-porting projects, also related to and arising under other special acts;

• it coordinates the new regulations of the special act with the existing legal framework.

Large, systemic infrastructure projects are implemented more efficiently under a special act.

The CTH Act is a comprehensive regulation facilitating overall preparation and implementation of construction of the airport, as well as required access roads, stations, railways and other necessary projects.

Authors: Baker McKenzie


Issues regulated by the CTH Act Details

Site preparation The area designated in the Council of Ministers regulation will be subject to special rules of spatial planning and management, real estate management and implementation of a public-purpose development.

Decision on siting of the Central Transport Hub (integrated decision)

The decision will allow partition and joinder of real estate in the designated project area. It will be the basis for the building permit and as such will be binding on the relevant admini-strative authorities in cases such as landmark protection, delivering, vacating and taking over of real estate, entries in the land register and cadastre, and other administrative issues.

Purchase of property in the area of the planned development by the State Treasury with compensation, as well as purchase of the perpetual usufruct rights to such property by the special-purpose vehicle (created by the special act)

The act defines the rules and procedure for such purchases.

Establishing limitations on use of neighbouring properties

The act ensures efficient implementation of the project (CTH and supporting projects).

Compensation for expropriation of real estate and creating limitations on use of real estate

The act defines the rules and procedure for granting such compensation.

Building permit

Legal aspects of project implementation For example, details of the operation and tasks of the special-purpose vehicle


The special act is an optimal solution, introducing effective tools for acquisition of real estate and the required legal and administrative permits, without generating extraordinary legal risks or other hazards. The special act also secures appropriate protection of the rights and interests of persons and entities affected by the project, such as the rights of the owners of expropriated real estate.

Permitted legal models of CTH contruction

Based on the special act, construction of CTH, as well as the installations and faci-lities required for its functioning, should be implemented by a special-purpose vehicle wholly owned by the State Treasury. Besides the airport component, the SPV will be responsible for projects supporting CTH, such as construction of rail-ways, public roads and transmission networks required for the proper functioning of the new airport.

Public tasks may be executed by public-sector entities themselves or in coopera-tion with private parties. In the latter case, depending on the scope of the enterpri-se, financing sources, preferred division of tasks and risks between the contracting entity and the contractor, as well as the know how and experience of the public and private entities in implementation of such projects, public entities may choose among three models of public-private cooperation:

classic public procurement model (“procurement model”)

public-private partnership model (“PPP model”)

concession for construction works and services model

(“concession model”).

All these changes are supposed to created systemic integrity of the regulations (eliminating potential ambiguities in interpretation) while increasing the efficiency of the whole project. Another goal is to achieve a compromise between the requirements of the development (CTH and supporting projects) and protection of the rights and interests of other entities.


The scope of the undertaking the public entity will entrust to private contrac-tors will partially determine its implementation model by itself. The PPP and concession models presume, in addition to contracting the construction works, also the long-term management or maintenance of the infrastructure by the pri-vate entity. The procurement model assumes entering into a short-term contract with the contractor (up to 4 years as a rule) for construction works, possibly inc-luding supporting services, supply of materials or just services themselves. Com-prehensive assignment of the long-term execution of the undertaking, including implementation of the construction stage, as well as infrastructure management or maintenance during the operation stage, is possible under the PPP or conces-sion model, while contracting a narrow scope or a specific project stage is typical for the procurement model.

Another key aspect differentiating the approved model for implementing the project is the financing sources (described in more details in p. 47-49 of the report), as well as the preferred division of tasks and risks between the public entity and the contractor. These factors directly influence the model for compensating the contractor.

In the procurement model, the project will be financed solely by the public entity, bearing all the economic risk, while the compensation of the selected contractor for work or services performed will be just a payment by the contracting entity. The situation is different in the other models.

Public-private partnership is based on a division of tasks and risk in a way agreed upon by the public and private entities. Compensation of the private partner is as a rule dependent on the actual use or availability of the subject of the partnership, and takes the form of an availability fee paid by the public entity in the operation stage. Usually, in the case of undertakings using the PPP model, income due directly to the public entity, such as taxes, public funds or levies collected for performing specific public services, is the source of financing such fee.

In the concession model, the private entity assumes most of the economic risk related to contract performance. It is presumed that the private entity will obtain its compensation mainly from the market, in the form of fees paid directly by users of the infrastructure, but without any guarantee that the private entity will recover its project expenditures or operating costs. In other words, unlike the procurement model, in both the PPP and concession models, the private partner or concessionaire finances the construction stage itself and recoups its expenditures only in the operation stage. The difference between these models is that the private partner in PPP receives compensation that may consist only or mainly of the availability fee paid by the public entity, while the compensation of the concessionaire should be solely or mostly fees from the users of the com-pleted infrastructure.

From the perspective of the permissible allocation of risk between the parties and the contractor compensation model, the PPP formula is generally the most fle-xible of the three. This makes it especially attractive for contracting entities trying to carry out very complex undertakings (in terms of technical, legal and financial aspects). This is especially true in the case of enterprises where the final shape and sources of financing are not yet known to the contracting entity. In this model, all these issues can be agreed upon at a later stage of project implementation, during the selection of the private partner.


Additionally, the latest revision of the Public-Private Partnership Act introduced significant leeway for contracting entities in choosing the procedural rules under which the private partner is selected. This change was introduced to eliminate the risk of selection of an incorrect procedure by the contracting entity at an early stage of the project, should the premises and original risk-sharing concept change later due to negotiations with the private entity. According to the amended regulations, regardless of the final risk-sharing arrangement and private partner compensation model, the procedure for selection of the partner can always be conducted pursuant to the Public Procurement Law. Contracting entities can also choose a less rigorous licensing procedure if from the start they are sure that the economic risk will be borne primarily by the private party.

The public entity can also implement an undertaking in the joint-venture formula, i.e. in the form of a company in which a private entity may hold shares. The current regulations do not specify the procedure for the sale of shares in such a company. The decision in this regard has been left to the public entity selling the shares (e.g. the Council of Ministers in the case of State Treasury companies), which can freely decide on the terms of sale. As a consequence, this formula may not be completely transparent and competitive.

If the undertaking encompasses maintenance or management services for the new infrastructure, not just its construction, then according to the interpretation of the Public Procurement Office, execution of the project in a joint-venture model may lead to attempts to circumvent the Public-Private Partnership Act and the pri-vate partner selection procedures prescribed there. Additionally, depending on the sources of financing of the task and the authority of the public entity as a sharehol-der to commission tasks by a company with private and public capital, the public procurement regulations, requiring a formal tender procedure to be carried out in each case, might be applicable in a specific situation. It should also be mentioned here that as an alternative to the “contractual” PPP (in which the private partner implements the project on the basis of a contract with a public entity), the “regu-lar” PPP model also allows project implementation by a PPP company created by the public entity and the selected private partner; the private partner may also join an existing company of the public entity. However, participation of a public entity in the ownership structure of a PPP company greatly increases the complexity of the project and tender procedures, as it imposes on the project implementation structure based on a PPP agreement internal relations between the shareholders of the PPP company (the public entity and the private partner), which also need to be regulated as part of a tender.

The special act does not expressly identify which private sector cooperation models are allowed or recommended for construction of the Central Transport Hub. The act only includes a general provision that orders and purchases by the special--purpose vehicle are subject to regulations on public procurement, concessions for construction works and services, and public-private partnerships, and that the SPV may (on its own or jointly with other entities) create subsidiaries pursuant to the Commercial Companies Code. Based on this, we can assume that all the models described in this part of the report are permitted. In particular, due to the referen-ce to PPP and concession regulations, besides constructing the Central Transport


Hub, the SPV may also commission private entities to manage or maintain CTH at later stages of the project. The special act also requires the selected contractor to comply with the management regulations, adopted under the procedure defined in the act, with respect to implementation of the project. Information on the requ-irement to observe the management regulations must be included in the terms of reference or concession documentation, and the contractor must submit a formal statement agreeing to enforce them.

Considering the general description of various possible models for the airport component of implementation of the Central Transport Hub project, we should pay special attention to the PPP model, which assumes a division of tasks and risks related to execution of the undertaking between the public entity and the private partner.

Firstly, the flexibility of the PPP model allows the public and private parties to freely agree on the best division of tasks and risks, while, by using a negotiated, two-stage procedure for selection of the private partner, permitting the decision on the final shape of the undertaking to be made at a later stage of the project. This method of contractor selection is recommended especially in the case of underta-kings as complex as CTH. Under this approach, after the initial qualification stage,

the public entity can negotiate all technical, legal and financial aspects of the project with invited, experienced private parties, in order to determine the final shape of the endeavour.

The PPP model, combined with selection of the private partner using the com-petitive dialogue procedure, is especially beneficial for the SPV, as it allows the contracting entity to access professional knowhow not only in the area of airport construction, but also airport management. Thus, after finalizing the negotiation stage, the SPV can better determine the final scope of the undertaking, while avo-iding difficult and hard-to-change decisions on the specifications of the project. The competitive dialogue mode assumes that the SPV will incorporate in the final terms of reference for the project some solutions proposed during negotiations by the private party. A call for tenders for implementation of the CTH project that takes into account suggestions made by experienced contractors should increase the number of competitive bids by reliable partners.

In an undertaking as complex as CTH construction, for the SPV to set non-nego-tiable conditions at the start of the process might thwart the tender by discouraging offers by experienced, reliable contractors or attracting excessively high bids (if the contractors decide that too much risk has been shifted to the private entity). Overly strict and non-negotiable tender criteria may also, paradoxically, cause problems in implementing the project itself, where contractors make overly optimistic price assumptions or risk evaluations, as happened in the case of the Berlin Brandenburg

Public-private partnership is the most advantageous form for implementing the Central Transport Hub project.


Airport project. The final risk allocation defined by the SPV in the terms of reference should also take into account the results of economic, financial, legal and technical analysis and be constructed in line with the rule of allocating a specific risk to the entity that can manage it better and cheaper.

Automatic transfer of all risk to the private partner is not economically viable, as it can lead to a sharp increase in the project cost. It is possible to distribute that risk, however. For example, under the special act the SPV can obtain a number of permissions and real estate related to CTH using a special procedure, and thus it could assume the risk of acquiring the necessary documents instead of shifting this obligation to the private partner. Similarly, real estate taken over by the SPV may be transferred to the private partner as the public entity’s contribution to the enterprise.

Secondly, as in the PPP model the private partner is constructing infrastructure which it will later operate, it is assumed that the partner is motivated to exercise due diligence at the construction stage in order to smoothly manage the project at later stages. An additional advantage of the PPP approach, assuming entrusting the project to a professional private entity, is that at the construction stage, the priva-te partner contributes its specialized know how regarding technical and business solutions which can facilitate later operation of the airport. Under the procurement model, no general contractor responsible solely for the construction stage has such experience or motivation.

Thirdly, an essential advantage of the PPP model is the possibility for a pri-vate partner to provide financing to the Central Transport Hub. Obviously, the issue of the profitability of such investment in this model, as well as of the division of the private partner’s compensation between the availability fee and fees collected directly from infrastructure users, requires detailed economic and financial analysis. Nonetheless, as the experience of foreign investors shows, the PPP model is suitable in the case of airport projects where part (not all) of the partner’s compensation can be financed by fees collected by the private partner directly from tenants of the commercial part of the airport. Considering that the airport component itself will not be subsidized by the European Union, the possibility of its being financed by the private partner is a distinct advantage compared to the full-service public procurement model. It can also be added that the latest amendment of the PPP Act introduced much more advantageous solutions in the area of financing of public-private partnerships by external entities, allowing public entities to enter into direct agreements with financing parties that can assume implementation of the pro-ject, substituting for the contractor or designating a proper new contractor if correct execution is endangered.

Finally, the PPP model allows the contracting entity to select a private partner that can carry out the project using a transparent tender procedure, ensuring fair treatment of other parties. It is important, however, to require the private partner to present binding project financing conditions and to avoid situations (which have happened in the past) where after the finalization of a multi-year tender the party is not able to present the required financial guarantees. Thus is why it is so important to include institutions financing the project at an early stage of the ten-dering procedure.


Legal aspects of financing the airport component of CTH In its scale, the Central Transport Hub is an unprecedented project in the modern history of Poland. And because the possibility of financing this undertaking from EU grants is low and it would be a significant burden for the state budget, CTH will also be one of the largest private capital investments.

Private capital means on one hand industry and financial investors hoping for a return on investment in the form of profit, and on the other hand financial insti-tutions providing funds at a specific interest rate, in general not dependent on the success of the project or its profitability.

The EU’s principle of free movement of capital basically eliminates significant legal obstacles regarding sources of private capital that could be used to finance CTH construction. Additionally, most major financial institutions from outside the European Union have a “European passport” in an EU country allowing them

Central Transport Hub is an unprecedented project in the modern history of Poland.

to conduct active operations on the European market without obtaining local regulatory approval, only notifying the authorities of their intention to operate on a specific market. This is applicable also to Poland.

Financing infrastructure projects using private capital improves the investment success rate statistically due to better recognition and optimal allocation of risk (technical, economic, legal). This in turn guarantees that the default rate, meaning the project failure factor, is significantly lower than in the case of projects financed through the state budget.

If the PPP model is used for CTH construction, we can imagine the SPV not being engaged at all in the project financing discussions. Under the division of tasks, this task would fall to the private partner, a capital or industrial investor, who would be responsible not only for finding financing for the airport project but also for the architectural design, construction itself, and subsequent management. In such scenario, the role of the CTH special-purpose vehicle would be limited to precise – and attractive to private investors – identification and definition of boundary conditions for the project.

The definition of the conditions might turn out to be an immensely complex task. We should remember that the private capital financing structure considered here is applicable only to the airport component, not the rail component, which is supposed to be financed using EU funds. At the same time, CTH’s success is depen-dent on harmonious implementation of all its components: airport, rail and road.

Additionally, creating an appropriate model of compensating private investors, ensuring predictability and stability of future cash flows, is critical for attracting the attention of private capital. Such model should guarantee repayment of the capital


investor’s obligations to institutions financing the CTH project, as well as achieving its own assumed rate of return on investment.

In the case of projects such as CTH a compensation model based on market demand risk will be difficult to accept for private investors, due to the coupling of CTH components (such as airport and rail components) as well as their implemen-tation and financing by various entities, among other reasons.

Financial institutions would be more willing to risk financing a project based on a predictable financial model than a project based on a significant margin of error related to passenger numbers. As a consequence, one should assume a much higher chance of success in a compensation model based on a fixed airport infrastructure availability fee, freeing the private investor from demand risks.

Capital investors will not be willing to accept risks beyond their control, such as the timely completion of rail and road infrastructure and the condition of LOT Polish Airlines.

Another extremely important issue is adapting the legal and economic model of financing (financial engineering) to the sources of such financing. If, for example, the CTH construction funds come from private means, the structure of the finan-cing should not diverge from known and proven financial solutions used in similar projects around the world. One such example is the project finance formula used in projects such as nuclear power plants, offshore wind farms, waste incineration plants, railway stations, transhipment ports and airports.

To outline a very much simplified model of financing the CTH airport compo-nent (based on the PPP formula and using project finance financial engineering), we could assume the following boundary conditions for this project.


Boundary condition Aim

Obligation to provide financing of the whole airport component by a private partner.

Obtaining competitive financing conditions for the project. Potential private partners are active participants in the financial market, with experience and competence in financial aspects. Hence we can assume that they will strive to obtain the most financially attractive project conditions (the party able to obtain the cheapest financing will have a competi-tive advantage during the partner selection process).

20-30% own capital contribution of the pri-vate partner.

Higher engagement level of the private part-ner (risking its own funds), creating proper conditions for bank financing.

Bank financing: 70–80% of investment expenses, such as bank credit obtained by the private partner.

Ensuring higher financial efficiency of the project than in the case of equity financing, as well as providing conditions for equity finan-cing of the remaining part.

20-25-year paid period of managing the air-port by the private partner, followed by unpa-id handover of the infrastructure to CTH.

Creating stable implementation conditions for all parties over a long but foreseeable period (CTH to provide management payments com-pensating the private partner for its expenses incurred on the project; private partner to obtain an assumed rate of return and banks to receive the agreed interest payments).

Private partner compensation model based on a fixed airport infrastructure availability fee during the management period, guaranteeing at least servicing the debt financing (inclu-ding costs of hedging interest rate and foreign exchange risk), as well as the assumed mini-mum rate of return of the capital investor.

Creating foreseeable conditions (for future cash flows) for investors and banks financing the project.

Availability fee financed using profits from the completed project (airport fees, parking lots, retail and food infrastructure, services, fuel service etc).

Ensuring funds to finance the project.


Boundary condition Aim

Potential surplus from profits generated by the airport infrastructure beyond the mini-mum assumed rate of return of the capital investor to be split between the private part-ner and CTH.

Motivating the private partner to manage the airport efficiently and maximize profit.

Securing debt (bank) financing for all airport project assets, with a simultaneous obligation to release guarantees if the project is taken over by CTH and earlier repayment of all obligations to the banks by the airport before the end of the management period (if CTH assumes airport management in the public interest or due to fault of the private partner before the end of the guaranteed manage-ment period).


Appropriate financial guarantees in case CTH does not fulfil its investment-related obliga-tions, as well as interruption or takeover of the project by CTH (due to the public interest, for example) before the end of the manage-ment period.


Risk matrix and allocation consistent with accepted market practices and experiences with similar projects in Europe and other parts of the world, including non-recourse by financial institutions against the capital investor in case of failure of the project. If the project fails, the capital investor will lose only the funds invested (its own contribution of 20–30%), but will not be responsible for repaying the remaining bank financing.


In view of the current, still very limited, knowledge of plans for implementing CTH, we should not rule out any model for financing it. However, it seems that the model for financing the airport component based on private capital, public-private part-nership, and project finance engineering should be the most successful.


Due to the scope of the planned investments, as well as the ambi-tions of the Polish government, the Central Transport Hub will be an undertaking impacting Polish and foreign companies operating in the aviation industry (including those not currently present in Poland or operating here in a very limited scope). Due to direct, indirect and induced influence, the project will also impact the market environment of rail and road carriers and service compa-nies. During the planning and implementation of CTH, and then during its operation, these different, often conflicting interests should be taken into account in order to generate the fullest benefit to the Polish and European economy.

CTH will greatly alter the Polish and European transport market.

Who is counting on the success of CTH?


CTH should be built primarily for LOT Polish Airlines, but also take into account the market realities and scale of operation of LOT and its competitors.

Air carriers are the group of parties that will be most affected by the construction of CTH.

A hub airport can only operate with a strong base carrier. Here that means in practice that the success of CTH is strongly and bila-terally connected to the condition of LOT Polish Airlines. Without a strong flag carrier CTH will not be utilized and may even prove redundant. On the other hand, without the new airport, the growth opportunities of the Polish carrier will be greatly limited. In theory, a hub at the new airport could be operated by any of the foreign, full-service airlines experiencing capacity issues at existing hubs, but that is hardly feasible in practice, as carriers try to simplify their route networks and focus on one or two hubs of their own. Development of a new transfer airport would require creating a feeder network, meaning huge investments in new connections, aircraft and infrastructure. Development of CTH as a new hub is a threat to existing transfer airports and carriers serving them, but the scale of this threat should not be overestimated. Over a time- frame of 10-15 years LOT may endanger midsize airlines like Finnair or TAP Portugal, but will remain much smaller than Lufthansa, British Airways, Air France-KLM, Turkish Airlines or Aeroflot.

+ Higher capacity

+ Possibility of launching new connections, especially long-distance

+ Possibility of managing own terminal

+ Greater transfer convenience

+ Higher customer service quality

+ Airline appeal for potential investors

Airlines

LOT Polish Airlines

– Outflow of passengers choosing transfers at CTH instead of existing hubs

+ Higher European airport capacity, improving the continental economy and leading to increased traffic to the EU Foreign full-

-service

Lufthansa Air France-KLMBritish Airways

very positive

negative

National carrier

AIrlines

IMPACT OF CTH


+ In case of presence at CTH, potentially higher costs, but also higher capacity and possibility of launching new routes

? Dependent on airport fees and CTH strategy

– In case of lack of space at CTH, focus on airports cheaper but less convenient for passengers, such as Modlin and Radom

Ryanair Wizz Air

Low-cost

– Airport located farther from the city, negatively impacting passenger convenience

+ Higher capacity and operating efficiency, reducing delays

Enter Air Travel ServiceRyanair Sun

Charter

+ Possibility of launching larger cargo handling centres – Chopin Airport cannot become a major cargo hub

+ Construction of separate cargo infrastructure (access roads, terminals, railway)Cargo

DHLUPSFedExpotentially LOT

very positive

neutral/ unknown

neutral/unknown

neutral/positive

neutral/negative

+ Better transfer offers for long-distance routes thanks to new Polish hub, strengthening LOT

+ No impact on growing regional airport direct traffic

+ Higher attractiveness of small airports as a cheaper alternative for CTH (for low-cost and charter carriers)

– Danger of losing hub feeder flights replaced by rail connections

– Limiting the offer of direct connections from airports located in CTH vicinity (Łódź, Bydgoszcz)

i.a. Kraków Gdańsk Wrocław

i.a.ŁódźBydgoszcz Lublin

Large Polish regional

Small Polish regional

Airports


+ Strengthening the position of Modlin and Radom as alternative Warsaw airports (for low-cost and charter carriers)

Modlin Radom

– Redirecting all or most of the traffic from Chopin Airport to CTH

– Possible shutdown of Chopin Airport

– Outflow of transfer traffic from existing hubs to CTH

Central

Foreign hubs

Central

Fuel providers

Chopin Airport

Frankfurt London-Heathrow Istanbul Dubai

Service and TSL industry companies

+ Higher traffic meaning more orders

+ Better infrastructure (such as maintenance hangars)

– Problems with sourcing employees in CTH region

Companies operating at airports (ground handling, maintenance, etc.)

LS Airport Services BGSWelcome AS LOT AMS Linetech

+ Higher traffic leading to higher turnover

+ New transport infrastructure facilitating fuel delivery

Orlen AviationBGS

negative

positive

very positive

neutral/positive

negative


Society

+ Chance to create a large cargo handling centre

+ Easier intermodal transport

+ Expansion of rail and road network

+ Increase in intermodal transport of cargo

+ Utilization of rail as CTH passenger feeder transport

Cargo and courier companies

Rail and road carriers

DHL UPS FedEx Poczta Polska

PKP Cargo, PKP Intercity road freight forwarders

positive

positive

positive

neutral/positive

neutral/ negative

Inhabitants of Baranów, Teresin and Wiskitki municipalities

+ Airport jobs

+ Better access infrastructure

– Necessity of sale (expropriation) of real estate

– Noise and overcrowding for inhabitants remaining in the region

+ Improvement of road and rail infrastructure connecting the two cities through CTH

+ Airport jobs

Łódź/Warsaw region inhabitants

Warsaw inhabitants

+ możliwości urbanistyczne związane z terenami po Lotnisku Chopina

+ Urban development opportunities at Chopin Airport site

– Potentially higher time and cost of airport transport in compari-son to Chopin Airport


Case studies Where airports have been built

The Oslo and Munich airports, both built relatively recently, basi-cally from scratch, are a perfect model for CTH, in terms of both good public transit access and traffic magnitude.

Berlin Brandenburg Airport is a perfect counterexample. It can be compared to CTH in magnitude and general assumptions, but the development process starkly reveals all the risks related primarily to lack of professionalism, bad planning and politicized supervision.


Despite ambitious plans, CTH will be a midsize hub (like Oslo or Munich), not a world-leading megahub.

The new Istanbul airport belongs to another category in terms of airport size. Additionally, it has been constructed outside the EU regulatory regime, significantly accelerating the development process. However, the idea of granting a 25-year concession for airport operation to the consortium that built it is worth consi-dering in the case of CTH.


CASE STUDIES

Berlin Brandenburg (Willy Brandt)

Oslo Gardermoen

Location Design and construction years

Cost (including supporting infrastructure)

Base carrier Traffic in 2018

Germany 2004– >PLN 31 billion none none




Norway 1992–1998 approx. PLN 10 billion

SAS, Norwegian 28.5 million

The new Berlin airport has been under construction sin-ce 2006, although construction was planned in the early 1990s. It is supposed to share infrastructure with the existing Schönefeld, the former East Berlin airport. The new facility was supposed to open in 2011, but the date was moved several times due to construction delays and then construction defects were detected shortly before opening. Currently opening is planned for 2020. Berlin Brandenburg is an excellent example of how not to build

a mega airport. The biggest problems of this project have been inadequate, politicized supervision, inexperience of project managers, poor planning (too small scale) and changes hastily introduced during construction, as well as underestimating construction costs. The new airport is supposed to replace both existing Berlin airports. It is being built by a public company owned by the Berlin and Brandenburg governments, which are supposed to manage it later.

The decision to move air traffic from the small Fornebu airport near the city centre was made in the late 1980s. Gardermoen, then a small military airport, was one of the locations considered. The decision was made to locate the new airport far from the city but connect it using high-speed rail. The act regulating construction of Gardermoen was finally adopted in 1992 and the facility opened after 6 years

of construction. It was basically built from scratch. The government of Norway decided to shut Fornebu down on the date of Gardermoen’s launch. Oslo is still served also by the low-cost Torp airport, as well as, recently, Rygge airport. The Fornebu area was transformed into a modern residen-tial and office district. The airport was built and is managed by a state-owned SPV (Avinor), under special regulations.


Munich

Istanbul New Airport




Germany 1969–1992 PLN 20 billion Lufthansa 46.3 million




Turkey 2012–2018 PLN 30 billion Turkish Airlines <0.1 million (tests)

A decision to construct an airport to replace the limited Riem airfield was made in 1969, but project planning took 11 years (even though the location had been chosen earlier). The process was conducted regardless of poli-tical pressure and at a slow pace, as the existing airport had some spare capacity. Construction started in 1980. The airport is owned by a public company (shareholders Bavaria, Munich, federal government). The airport was

designed to allow flexible expansion using satellite ter-minals. Currently discussions on construction of a third runway are being held. The terminals mostly designed 40 years ago have capacity to spare and the airport is considered one of the most efficient European hubs. The old Riem airfield was shut down on the date of opening of the new airport and then transformed into a trade fair and conference centre.

The decision to build a new airport in Istanbul was made by the government without consultations in 2012. A tender to select the airport construction contractor and opera-tor, which would receive a 25-year lease, started a year later (won by a consortium of private Turkish compa-nies). After the conclusion of the tender construction took only five years. The airport was designed to be the largest in the world, able to serve as many as 150 million passengers per year after the expansion planned for the next few years. During construction, workers protested

against abuse of their rights, and there were also signifi-cant doubts surrounding the environmental responsi-bility of the contractors. The airport opened in October 2018, according to plan, starting with a small amount of test traffic. The airport has been fully operational since 6 April 2019. After the launch, the existing Ataturk Airport, overcrowded and lacking expansion options, will be shut down. Sabihy Gökcen Airport, on the Asian side of the city, serving mostly low-cost traffic, will continue operations, and is privately owned.


Recommendations

Lack of unused European airport capacity is one of the largest problems for aviation in the region, leading to tangible economic losses. Poland is still a rather undevelo-ped aviation market, but it is already subject to saturation of the available capacity.

Due to errors made in planning airport developments in central Poland, airport overcrowding is basically unavoidable in the perspective of the next 5–7 years. The airports functioning currently do not offer the possibility for expansion into a hub role: Chopin Airport is too constricted spatially, Modlin is a low-cost airport and, like Radom, is not optimally located.


Construction of a new airport is an ambitious undertaking, but necessary from the perspective of the Polish and European economy. Western European hubs are overcrowded, with limited expansion possibilities. A new hub airport in a region that has not played a hub role in the past would allow for an increase in traffic to and from the continent.

CTH is a project that must be planned nearly a decade before launch. This is difficult especially due to the rapid changes currently occurring on the aviation market. New trends in carriers’ business models should be taken into account when designing the new airport.

After CTH is launched, Chopin Airport should be shut down or its operations signifi-cantly limited. Maintaining both airports would decrease the competitive advantage of LOT Polish Airlines, as well as discourage other carriers from moving to CTH, leading to a situation where the new airport would not be used optimally but the old one would still generate noise. Shutdown of Chopin Airport would create a chance for redevelopment of the district where it is located. The benefits of allowing stric-tly regulated use of Chopin Airport could be considered, with a limited number of flights in the style of London City, but this seems an unnecessary complication. A key condition for the shutdown of Chopin Airport is ensuring good rail access to the new airport, 25–30 minutes from the Warsaw city centre.

Low-cost carriers should be allowed at CTH, with infrastructure adapted to their needs. Such carriers play an increasingly important role in the transport system, and attempting to block their growth (motivated probably by a desire to protect LOT from more efficient competition) would be harmful to the economy. It should be assumed that when CTH is launched, low-cost carriers will cooperate more closely with full-service ones and offer more long-distance connections. They could also create their own hubs, due to continuing hybridization of business models. CTH’s infrastructure should be adapted to their needs, for example by considering a sepa-rate terminal for low-cost carriers.


The CTH terminal(s) should be designed flexibly, allowing further growth. Fore-seeing trends on the aviation market beyond a decade is very difficult, hence the terminal design should take into account issues such as changing traffic directions in the Schengen area and outside it. Construction blocking development should be avoided, for example due to lack of space for additional non-Schengen gates. An airport is built once every few decades, so the design needs to assume the possi-bility of building another terminal, supporting terminals and additional aviation infrastructure.

The design needs to be adapted to the scale of the market. CTH construction is a flagship public project, with a temptation to over-scale. This is worsened by the rapid growth of LOT in recent years, which could create the impression of a world--leading carrier. The reality is that LOT is and will remain a midsize carrier, while CTH will be a secondary hub. Hence, the design should be suited to scale, remem-bering though that it’s better to slightly over-scale than under-scale and introduce corrections (as in the case of Berlin Brandenburg). Also, the architectural design itself should take into account the reality that solutions possible and profitable in Asia or the Middle East may not be viable on the regulated European market.

CTH should be an apolitical project. Independent project supervision, as well as listening to the opinions of all stakeholders, including low-cost carriers and LOT’s competitors, is critical to the success of the project. The Polish carrier will be the most important client, but it can realistically fill only 50–60% of CTH’s capacity. Attempts to politicize the project and giving it too much importance could easily lead to over-scaling or even limiting the air traffic of other carriers. Even in the most optimistic scenario, LOT will never be able to meet all the needs of passengers flying to and from Poland on its own.

Years* Task Challenges identified How to mitigate them

2019 Selection of strategic adviser

Selection of a partner bringing experience and knowhow to the compa-ny and flexible enough to function within the EU regulatory framework

Paying attention to expe-rience and a long-term approach rather than just the most favourable finan-cial terms offered by the potential strategic adviser

The road to CTH launch


Years* Task Challenges identified How to mitigate them

2019–2020 Environmental and siting proceedings

Risk of negative environmental impact of the project

The location chosen initially does not cause risks related to the project being blocked due to environmental issues

2019–2020 Feasibility study Uncertainties regarding the model of financing airport construction and management

Making a decision on the financial model (even without choosing a speci-fic partner) and a detailed investment budget, prepa-ring financial forecasts for the airport management company

2019–2020 CTH strategic plan Uncertainties regarding CTH traffic structure

Making a decision on the future of Chopin Airport and other airports in central Poland, as well as allowing low-cost carriers at CTH

Up to 2020 Real estate acquisition Blocking of purchases by inhabitants

Dialogue with inhabi-tants plus fair prices, even slightly higher than market prices, expediting the acquisition process as much as possible

2020–2021 Tender for design and con-struction of CTH

Lengthy tender procedu-res, growing costs of con-struction and labour

Excellent formal prepara-tion of the tender, con-ducting the tender under multiple criteria (not just the lowest price), acqu-iring support of consul-tants and parties with significant experience in similar projects

2021–2027 CTH construction Construction costs, risk of (sub)contractor insolven-cy, errors made during construction

Assuming a time mar-gin for the construction process, avoiding efforts to minimize cost by any means

* Schedule based on the government’s CTH construction concept, as well as the current state of project preparation.


LiteratureBujnik, Jakub. 2018. “ARUP: Analiza możliwości rozbudowy Modlina.” Pasazer.com. 20 April. Online. https://bit.ly/2RwqkVd.

Button, Kenneth; Soogwan Doh; Junyang Yuan. 2009. “The role of small airports in economic development.” Airport Management, vol. 4, no. 1, pp. 1–12.

ch-aviation.com

Eurocontrol. 2018a. European aviation in 2040: Challenges of growth. Online. https://bit.ly/2KUEwnT.

Eurocontrol. 2018b. Skyway Magazine 69 (Autumn/Winter). Online. https://bit.ly/2AqzIQD.

InterVISTAS. 2015. Economic impact of European airports: A critical catalyst to economic growth. Online. https://bit.ly/2aRbVxb.

Horsch, Sebastian. 2017. “Wie München schaffte, wie Berlin nicht kann.” Merkur.de, 16 May. Online. https://bit.ly/2C52E0z.

Mukkala, Kirsi; Tervo, Hannu. 2013. “Air transportation and regional growth: Which way does the causality run?” Environment and Planning, vol. 45, no. 6, pp. 1508–1520.

OECD. 2016. Country case: Governance failures in the management of the Berlin Brandenburg International Airport. Online. https://bit.ly/2Rwy2yB.

Olipra, Łukasz. 2016. “Zmiany struktury mobilności lotniczej społeczeństwa po akcesji Polski do Unii Europejskiej.” Studia i Prace WNEiZ US, no. 46 (2).

Rada Ministrów RP. 2017. Koncepcja przygotowania i realizacji inwestycji Port Solidarność – Central Transport Hub dla Rzeczypospolitej Polski.

Sipiński, Dominik; Cybulak, Paweł; Placha, Karol. 2016. Lotniska w Polsce. Łódź: Księży Młyn.

Knowledge tailoredto your needs

BOARDROOM PRESENTATIONS We regularly brief management boards of Polish and international companies on the domestic situation, EU affairs, macroeconomic outlook and investment climate. Our analysts travel abroad on request.

DOSSIERS

Looking for a short study on a subject that matters to you? Our dossiers make a difference on business trips, executive visits to Poland and when key economic and political developments need to be explained.

more at: www.politykainsight.pl/en

THEMATIC REPORTS

Our publications stand out with their exper-tise, unorthodox thinking, clear language and sophisticated graphic design. We prepare reports for both internal and public use.

STAKEHOLDER MAPPING

We constantly monitor the activities of Polish and EU institutions, so we know who makes regulatory and legislative decisions, along with when and why. Take advantage of our institutional knowledge.

[email protected] (+48) 22 456 87 77

Central Transport Hub - Polityka Insight

Documents

Transcript of Central Transport Hub - Polityka Insight